Class Notes (838,990)
Canada (511,155)
York University (35,577)
ADMS 3530 (82)
Lois King (15)
Lecture

# Review Questions 8F11.pdf

5 Pages
104 Views

School
Department
Administrative Studies
Course
ADMS 3530
Professor
Lois King
Semester
Summer

Description
Review Questions 8 Textbook Page Questions 295 2 296 8, 10, 13 297 16, 18, 19, 22 298 24 Solutions 2. a. Average cost = \$1.75 million / 1 million = \$1.75/burger b. Average cost = \$2.25 million / 2 million = \$1.125/burger c. The fixed costs are spread across more burgers — thus the average cost falls. 8. At the break-even level of sales, which is 60,000 units, profit would be zero: Profit = 60,000  (2 – variable cost per unit) – 20,000 – 10,000 = 0 Solve to find that variable cost per unit = \$1.50 10. a. Accounting break-even would increase because the depreciation charge will be higher. b. NPV break-even would decrease because the present value of the depreciation tax shield will be higher when all depreciation charges can be taken in the first five years. 13. If CF = 0 for the entire life of the project, then the PV of cash flows = 0, and project NPV will be negative in the amount of the required investment. 16. Figures in Thousands of Dollars Sales \$16,000  Variable cost 12,800 (80% of sales)  Fixed cost 2,000  Depreciation 500 (includes depreciation on new checkout equipment) = Pretax profit 700  Taxes (at 40%) 280 = Profit after tax \$ 420 + Depreciation 500 = Cash flow \$ 920 a. Cash flow increases by \$140,000 from \$780,000 (see Table 8.1) to \$920,000. The cost of the investment is \$600,000. Therefore, NPV = –600 + 140  annuity factor (8%, 12 years) = –600 + 140  7.536 = \$455.04 thousand = \$455,040 b. The equipment reduces variable costs from 81.25% of sales to 80% of sales. Pretax savings are therefore 0.0125  sales. On the other hand, depreciation charges increase by \$600,000/12 = \$50,000 per year. Therefore, accounting profits are unaffected if sales equal \$50,000/.0125 = \$4,000,000. c. The project reduces variable costs from 81.25% of sales to 80% of sales. Pretax savings are therefore .0125  Sales. Depreciation increases by \$50,000 per year. Therefore, after-tax cash flow increases by (1 – T)  (Revenue –  Expenses) + T  (Depreciation) = (1 – .4)  (.0125  Sales) + .4  50,000 = .0075  sales + 20,000 For NPV to equal zero, the increment to cash flow times the 12-year annuity factor must equal the initial investment. cash flow  7.536 = 600,000 cash flow = \$79,618 Therefore, .0075  Sales + 20,000 = 79,618 Sales = \$7,949,067 NPV break-even is nearly double accounting break-e
More Less

Related notes for ADMS 3530
Me

Log In

OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.

Request Course
Submit